Follow Up

Facebook's Results Fail to Impress

Facebook racked up big gains in mobile advertising, but at the expense of its core desktop business. With a market value of $71 billion and annualized mobile revenue of just $1.5 billion, that's hardly something to celebrate.

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Wall Street breathed a sigh of relief on Wednesday when Facebook reported first-quarter results that merely met investor expectations. Revenue rose 38%, to $1.46 billion, year over year, and pro-forma earnings were unchanged at 12 cents per share.

Investors responded by pushing the stock 5.6% higher on the day. Shares closed Friday at $28.31, still well below last May's offering price of $38, but 60% higher than last summer's low.

Scratch the surface, however, and it becomes clear that
FacebookFB 0.49196871583550583%Facebook Inc. Cl AU.S.: NasdaqUSD119.495
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46.11969111969112Market Cap
343272365515.716
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1943900More quote details and news »FBinYour ValueYour ChangeShort position
(ticker: FB) is cannibalizing desktop ads to expand its mobile ad revenue. Mobile revenue totaled $374 million in the first quarter, up from $306 in the fourth quarter and virtually nothing a year earlier. Yet overall desktop ad sales of $875 million were flat compared with a year-earlier and may have dropped 15% to 20% in the U.S.

JPMorgan analyst Doug Anmuth summarized the bull case in a note, writing, "Facebook continues to lay the foundation for future growth, and we remain bullish as it is early in social advertising with less than 10% of budgets allocated to social."

Facebook trades for a rich 50 times projected 2013 pro-forma profit of 56 cents a share. And that earnings figure is overstated because it doesn't include Facebook's sizable equity-based employee compensation, which is largely restricted stock. The more relevant 2013 profit estimate is Facebook GAAP profit of around 38 cents, which includes the stock-based compensation. Facebook trades for 75 times that earnings estimate. GAAP refers to generally accepted accounting principles. Street analysts, who get paid in part with valuable restricted stock, regularly ignore that sizable cost for technology companies.

Facebook skeptics like Richard Greenfield of BTIG Research worry that the company is jamming too many ads into the "newsfeeds" of Facebook subscribers and thus risks alienating them. "The ad quality on Facebook appears to be getting worse each quarter, not better,' he wrote last week.

"Given all the data that Facebook knows about me and my friends, how do we see an ad for 'Lower My Bills,'" Greenfield says. He also wonders where Facebook's mobile strategy fits "within a single-purpose app world," noting that "Instagram, Path, Vine, Snapchat, Keek, WhatsApp, Yelp, and OpenTable, among others all appear to do one thing really well." Greenfield also observed that Facebook's heavily promoted gifts business seems more about gag gifts like Handerpants, which are billed as "Tighty-Whiteys for Hands," than a serious
Amazon.comAMZN 0.035186946945903325%Amazon.com Inc.U.S.: NasdaqUSD767.6
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-style (AMZN) retail initiative.

Google
(GOOG) is investing in a range of innovative projects to drive its growth, like YouTube, self-driving cars, interactive eyeglasses, maps, and Android software. Facebook seems more focused on barraging subscribers with ads to meet Street profit expectations. Google looks like the long-term winner and investors can buy its shares, now around $840, for less than 20 times 2013 earnings.

-- Andrew Bary

United's Skies Are Friendly Again

Prospects were decidedly glum a year ago when Barron's published a bullish piece on airline behemoth
United Continental HoldingsUAL 2.3783337915864724%United Continental Holdings Inc.U.S.: NYSEUSD74.47
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435000More quote details and news »UALinYour ValueYour ChangeShort position
("On the Runway, Ready for Takeoff," May 7, 2012). United Continental was still beset by operations-integration issues resulting from the 2010 merger between United and Continental that served both to irritate passengers—especially higher-revenue business travelers—and spawn heavy nonrecurring charges.

A year later, a lot of those issues have been resolved and earnings are improving, with analysts' consensus earnings estimates of $3.71 this year and $5.01 for 2014. The stock (ticker: UAL) is up nicely, too, to $33.01 from $22.20 at the time of our story, a gain of 48% compared with an 18% rise for the S&P 500. The shares hit a 52-week intraday high of $33.82 on Friday.

We are still decidedly upbeat about United Continental's future. While the airline has fixed its reservations, frequent-flier, and yield-management systems, it still has further to go to realize the full labor- and fleet-cost synergies of the merger that created such an enviable global-route system. Joint labor agreements with the pilots and other employees remain to be made final but will be settled in the not-too-distant future.

The air carrier has solved many of the merger issues that chased away business flyers.
Lam Yik/Bloomberg News

United Continental is successfully wooing back much of the business traffic it lost as a result of a punk economy and shoddy service. On-time performance has improved dramatically. Perks are being added—fancy refurbs of United Club lounges and additional Wi-Fi connectivity aboard flights, for example.

UNITED CONTINENTAL SHOULD benefit along with Delta in picking off additional business travelers later this year when the American/U.S. Air merger is finally consummated. Then it will be its turn to cope with all of the inevitable integration headaches that United Continental had to contend with in the past three years.

Deutsche Bank airline analyst Michael Linenberg has a one-year target price of $40, 21% above the current quote. But Jeff Kauffman of Sterne Agee sees United Continental topping $50 over the next couple of years because of the greater pricing power of airlines in the wake of the consolidation of carriers. The industry is likewise more financially astute, focused on return on capital rather than bolstering market share by engaging in overexpansion followed by bloody price wars.

Kauffman expressed the same thesis in our story a year ago. It now appears that he's dead right, which should continue to be good for shareholders.